Question

Making reference to comparative advantage, Heckscher-Ohlin and strategic trade theory make a case for brexit

Answer 1

In order to understand the impact of Brexit on the United Kingdom from the angle of comparitive advantage, Heckscher-Ohlin model and strategic trade theory, we need to first understand what the terms mentioned in the question mean. The terms are explained as follows.

Comparitive advantage: In simple terms, comparitive advantage of a country, business or an individual over another refers to the benefits that accrue to a nation, individual or a firm for producing output of a particular commodity over another at a lower opportunity cost due to advanced technological capabilities and/or better factors of production than the other.

Example: If a country A can produce 10 tons of bread and 500 cars, while country B can produce 2 tons of bread and 450 cars. It would be better for country A to produce more bread and leave the cars to country B as country A is 5 times more productive with respect to bread. With respect to car production it is only 0.9 times better than country B. According to economic theory, if the theory of comparitive advantage is applied it would be beneficial for country A and B to stick to producing what they are best at and resort to trade than trying to produce both cars and bread to achieve self reliance.

Heckscher-Ohlin Model: The model suggests that countries export what they are best at producing. The model not only applies to the commodities in question but also to factors of production such as labour etc. If labour is cheap in a country it is better to go for more labour intensive tasks than capital intensive work which may raise the costs of production. The model is used to analyse the trade equilibrium between nations that engage in trade with each other.

Strategic trade theory: Strategic trade theory refers to the policy and practices adopted by a country to develop its trade and economy. Boosting exports by way of subsidies, imposing duties on imports, developing R&D(research and development), hiring cheaper labour from other nations etc are some of the strategic measures taken by a nation to develop its own firms. This gives it a competitive edge with other foreign firms. The strategic trade theory in general is concerned with trade interactions between firms that try to gain an advantage over the other in the markets.

Now, let us apply these terminologies to brexit and understand its implications.

Brexit refers to the exit of Britain from the European Union. This means that it will no longer be a part of the trade policies and practices adopted by the EU. People who are advocating brexit say that the EU is riding on the economic success of Britain and that the country is losing more that it is gaining by means of contribution. Studies suggest that the comparitive advantage of being on its own is higher that being a part of EU as being the second most powerful economy in the group it contributes around 14.1 billion Euros, while receiving only 7 billion Euros in the form of subsidies.

The Heckscher-Ohlin model suggests that a country exports what it is best at producing at the best prices available and lower cost of production. But in the case of Britain, there is a feeling that the country is unable to get best out of competitive pricing due to the protectionist policies of the EU. Pro-brexit advocates feel that their nation's potential of producing commodities it is best at is jeopardised due to trade policies of the EU that the UK has to abide by.

Strategic trade theory suggests policy measures and practices with respect to trade. This involves measures to increase competitive interaction between firms. The reason for brexit is that the country is receiving far less subsidies in comparison to its contribution which is nearly double. Export subsidies play an important role in giving a strategic edge to a nation's firms as against its foreign competitors. In the case of Britain, pro-brexit advocates want a more independent and returns based trade with other economies and hence the move.